What Type of Loan Do I Need for a Double Garage Addition?

Homeowners can borrow against the equity in their home to fund a new garage.

An expanded garage offers a homeowner numerous benefits. In addition to the extra space and added home value, storing your car inside can lower your insurance payments. However, funding this project can get costly. Luckily, homeowners looking to renovate their garage have a handful of loan options.

Leveraging the Value of Your Home

A home equity loan or second mortgage allows a homeowner to borrow against the equity of the property. Generally, if approved, homeowners get their loan as a lump sum. Another option is a home home equity line of credit. Unlike a home equity loan, borrowers can access this loan a little at a time. Borrowers generally have less time to pay off a second mortgage -- 15 years versus 30. You likely will not qualify for these loans if you are late on your mortgage payments or have little or no equity in your home.

Home Improvement Loan

Another option for a home improvement loan is the Federal Housing Administration's 203(k) rehabilitation mortgage. With this loan, you can both refinance your first mortgage and take out a little extra for a home improvement project. However, the limits for an FHA loan tend to be lower than a home equity loan or line of credit. If you don't qualify for a home improvement loan, you also can take out a loan against your savings or retirement. The downside? Unlike a home improvement loan, you can't deduct the interest from your taxes.

Preparing to Apply for Your Loan

Before you apply, estimate the cost of your renovation. Outline the specifics of your project to a handful of contractors, and collect their bids. If you plan to do the labor yourself, research the cost of material, equipment and any permit fees you'll need. Add 10 to 20 percent to the estimated cost as a cushion in case anything goes wrong.

Getting the Best Rate

The key factor to securing a competitive loan rate is a good credit score. If your credit score is low, improve it by paying down your debt on time, particularly on high-interest credit cards. Review your credit report to make sure there are no mistakes or errors. Make sure you meet the income requirements. Most lenders will not lend to a homeowner who would have to pay more than 42 percent of their gross monthly income as repayment on their debts.

About the Author

John Louis is an award-winning journalist based in Washington, D.C. He attended Columbia University, where he was editor-in-chief of the "Columbia Spectator." He is currently studying law at Georgetown University.